Analysis by Dr. Nancy Yamaguchi

 

West Texas Intermediate (WTI) crude prices have retreated to approximately $48.50 per barrel (/b) this morning. The market sell-off picked up after revisions to the supply and demand balance, and as the U.S. and North Korea continued to exchange threats in what has been likened to a game of chicken. President Trump increased pressure by not only standing behind his “fire and fury” threat, but adding that this statement “wasn’t tough enough.” He warned North Korea that the U.S. military was “locked and loaded.” Equity markets around the world tumbled further, and risk-off sentiment has sent investors to safe havens such as gold, bonds and the Yen. Gold prices are at a nine-week high.

 

The markets also took a step back on news that may lengthen the amount of time needed before balance is achieved in the global oil market. The Energy Information Administration (EIA) released its Short-Term Energy Outlook (STEO) forecasting that U.S. crude production will average 9.3 million barrels per day (MMbpd) in 2017, and that it will rise to 9.9 MMbpd in 2018. This will be the highest level of U.S. output in history, surpassing the previous record of 9.6 MMbpd set in 1970.

 

The STEO also forecast that global oil inventories will be largely unchanged in 2017, and that they will increase by an average of 0.2 MMbpd in 2018.

 

Adding to this, the International Energy Agency (IEA) reduced its forecast of the amount of crude needed from OPEC this year and in 2018. With strong output elsewhere and a reduction in some key forecasts of demand growth, around 0.4 MMbpd less crude will be needed from OPEC.

 

U.S. crude production slid modestly during the week ended August 4, declining by 7 thousand barrels per day (kbpd). Last week, Baker Hughes reported that the active rig count fell by four (one oil rig and three gas rigs). The rig count data for the current week will be released today.

 

WTI crude opened at $48.52/b, a significant drop of $1.16 from yesterday’s opening. Currently this morning, WTI prices are $48.42/b, down by 10 cents since today’s opening.